I watch city things. For the past year, I tracked municipal finance and urban economics in the U.S. Now, based in Bangalore, I will focus on the economic opportunities and pratfalls of cities across India and throughout Asia. I co-founded City Ledes, an urban policy newsletter. And I cover urbanism and politics for The Atlantic Cities, GOOD, and Next American City, among others. I hold a masters in public policy from the University of Chicago. You can follow me on Twitter, where I promise to send off quality missives.

Infrastructure Trust Falls With Emanuel

For the future of cities, the Tuesday vote at the Chicago city council was very, very important. Immensely so. I’ve been quiet about it here because I was reporting on it for piece over at the Atlantic Cities:

Just before the Chicago City Council moved to vote on Tuesday, Alderman Ed Burke stood up. The powerful councilman and fierce mayoral ally laid out what was at stake, saying, “this plan fundamentally permits us to build for the 21st century.”

Moments later, the council overwhelmingly approved Mayor Rahm Emanuel’s controversial Infrastructure Trust, a proposal to leverage private funds for city projects. An infrastructure bank is unprecedented on the municipal level, and may become a critical model for how cities pay for new building.

At this point, private backing of city projects have been one-off numbers—a highway, a recycling center, a water treatment plant, a fleet of parking meters, say. With the Trust, Emanuel is taking an enormous step. He’s essentially institutionalized this lever. Now any city project can conceivably become a public-private one. Each investment structure will be unique, which makes speculation that the Trust will make or break the city just that.

While I doubt that an identical proposal will pop up in another city anytime soon, the Trust does give definitive shape to an idea that’s been floating around policy and investor circles for a long time.

Emanuel’s ambition is incontestable. His plans are commendable. On the council floor on Tuesday, Joe Moore, a northside Alderman (and sudden mayoral friend), warned that “cities that fail to invest in their infrastructure are cities in decline.” That’s absolutely right. And the specter of decline always floats uneasily above the city—call it the Detroit effect.

The Trust’s first project, Retrofit Chicago, a $200 million plan to green-ify city buildings, is a really good policy idea. Details haven’t emerged yet; but I suspect that the plan can generate decent enough cash flows to satisfy investors, without the dreaded hikes in taxes or fees. (Emanuel is a savvy enough politician to avoid that pitfall on the Trust’s first go.) And the city certainly won’t have problems finding initial rounds of financing. Big city projects are quickly emerging as an attractive investment asset class. In a flowery but telling line, Citibank wrote in a letter of interest to Emanuel’s team that the Trust “could break new ground in terms of partnerships between government and the private sector in America.”

The other parts of his infrastructure vision—bus rapid-transit, subway expansions, high-speed internet installation—are also really good policy ideas. Whether they can keep investors happy with their revenues is another question. In Chicago, it’s the monumental assets—the CTA, the sewers, the airports—that will flow. And that explains Cate Long’s concern that investors won’t be appeased until they get their hands on those. (When asked about these accusations that the Trust would lead to leasing or selling, city officials fiercely denied them.)

The other lingering question is whether these private projects won’t end up costing more than they would through regular bond issuance. Chicago’s credit rating is shoddy. Just today, Moody’slowered it’s outlook for the city from stable to a brooding “negative.” (For the city’s pension disaster, importantly.) But their rating is still investment grade. The city can still borrow at the low prevailing interest rates.

Aaron Renn is much smarter than I am on the risks and implications of private partnerships. His post should be read in full. But here’s the part that sticks out:

…cities are pretty much at the mercy of sophisticated investors who do transactions like this day in and day out for a living. Even in a sophisticated financial town like Chicago, multiple contracts have blown up in the city’s face. The idea that somehow governments will do a better job of negotiating deals with an infrastructure bank than they’ve done with other private investors seems dubious.

Let’s be honest: our mayor, the former investment banker, is not unsophisticated on this stuff. Nor is his CFO, Lois Scott, who comes straight from the private finance sector. But they both are approaching public finance from a very distinctive angle, different from the city leaders before and elsewhere.

In his words before the council, Emanuel repeatedly, emphatically distinguished the Trust from the parking meter deal, a four-letter word in this town. And the city swore, to me and others, that this isn’t a privatization deal.But do keep this in mind: before Emanuel handpicked her, the city CFO ran Scott Balice Strategies, a financial advising firm that, as the Chicago Reader spotted, gained some notoriety for pushing strapped localities to take their public assets and put them on the auction block.

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